Tuesday, September 11, 2007

Bernanke Says `Saving Glut' Still Helps Lower Rates (Update1)

By Scott Lanman

Sept. 11 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the ``global saving glut'' is still helping to keep interest rates low, and they may not rise much even should the pool of excess capital dwindle in coming decades.

``Factors other than the saving-investment balance affect long-term interest rates,'' Bernanke said in a speech in Berlin. ``We are again reminded of the need to maintain appropriate humility in forecasting returns and asset prices.''

The remarks reprised Bernanke's positions on the U.S. current-account deficit, the broadest measure of trade, which swelled to a record last year. The process of narrowing the gap ``will have both real and financial consequences,'' he said.

``Although the U.S. current account deficit is certainly not sustainable at its current level, U.S. liabilities to foreigners are not, at this point, putting an exceptionally large burden on the American economy,'' Bernanke told a conference sponsored by the Bundesbank.

Should the deficits stay near current levels, ``foreign investors would ultimately become satiated with dollar assets, and financing the deficit at a reasonable cost would become difficult,'' the Fed chief said.

Bernanke didn't comment on the current outlook for the economy or interest rate policy. He said on Aug. 31 that the central bank would do what's needed to keep the credit rout from sinking the broader economy.

2005 Idea

Bernanke introduced the idea of a ``global saving glut'' in a March 2005 speech, attributing the increase in saving around the world to a ``combination of diverse forces.'' That, said the then-Fed governor, helped explain the widening U.S. current- account gap and ``relatively low level of long-term real interest rates'' worldwide.

He's repeated that position since, telling U.S. lawmakers in March 2006 and July 2006 that he stood by the hypothesis.

Bernanke is the last Fed policy maker scheduled to speak before officials meet in Washington one week from today. Investors expect the central bank to lower its federal funds rate target to 4.75 percent from 5.25 percent, based on the price of rate futures on the Chicago Board of Trade.

The U.S. current-account deficit widened in 2006 to $811.5 billion, the biggest ever, or 6.2 percent of gross domestic product, from $754.8 billion the prior year, and the country needs to attract about $2.1 billion a day to fund the gap.

The gap has grown from $640 billion, or 5.5 percent of GDP in 2004, and $125 billion, or 1.6 percent of GDP in 1996, Bernanke said.